Airbnb: The Rise and Rise of the Hospitality Industry

Today we’re going to talk through the history of Airbnb. But more importantly, we’re going to look at what brought the hospitality industry to a place so ripe to be disrupted. The ancient Greeks, Romans, Persians, and many other cultures provided for putting travelers up while visiting other cities in one way or another. Then inns begins to rise from roads connecting medieval Europe, complete with stables and supplies to get to your next town. The rise of stagecoaches gave way to a steady flow of mail and a rise in travel over longer distances for business gave way to much larger and fancier hotels in the later 1700s and 1800s. In 1888 Cesare Ritz became the first manager of the Savoy hotel in London, after time at the Hotel Splendide in Paris and other hotels. He would open the Paris Ritz in 1898 and expand with properties in Rome, Frankfurt, Palermo, Madrid, Cairo, Johannesburg, Monte Carlo, and of course London. His hotels were in fact so fancy that he gave us the term ritzy. Ritz is one of the most lasting names but this era was the first boom in the hotel industry, with luxury hotels popping up all over the world. Like the Astor, the Waldorf Astoria, the Plaza, the Taj Mahal, and the list goes on. The rise of the hotel industry was on its way when Conrad Hilton bought the Mobley Hotel in Cisco Texas in 1919. By 1925 he would open the Dallas Hilton and while opening further hotels nearly ruined him in the Great Depression he emerged into the post World War II boom times establishing a juggernaut now boasting 568 hotels. Best Western would start in 1946 and now has 4,200 locations. After World War II we saw the rise of the American middle class and the great American road trip. Chains exploded. Choice Hotels which acts as more of a franchiseier established in 1939 sits with 7,000 locations but that’s spread across Extended Stay, MainStay, Quality Inn, Cambria Hotels, Comfort Inn, and other brands. Holiday Inn was founded 1952 in the growing post-war boom time by Kemmons Wilson and named after the movie by the same name. The chain began with that first hotel in 1952 and within 20 years hit 1,400 Holiday Inns landing Wilson on the cover of Time as “The Nation’s Innkeeper.’ They would end up owning Harrah's Entertainment, Embassy Suites Hotels, Crowne Plaza, Homewood Suites, and Hampton Inn now sitting with 1,173 hotels. The Ramada would start the next year by Marion Isbell and has now grown to 811 locations. Both of them started their companies due to the crappy hotels that were found on the sides of roads, barely a step above those founded in the medieval days. Howard Johnson took a different path, starting with soda shops then restaurants and opening his first hotel in 1954, expanding to 338 at this point, and now owned by Wyndham Hotels, a much later entrant into the hotel business. Wyndham also now owns Ramada. The 1980s led to a third boom in hotels with globalization, much like it was the age of globalization for other brands and industries. The oil boom in the Middle East, the rising European Union, the opening up of Asian markets. And as they grew, they used computers to build software to help and cut costs and enable loyalty programs. It was an explosion of money and profits and as the 80s gave way to the 90s, the Internet gave customers the ability to comparison shop and the rise of various sites that aggregated hotel information, with Expedia, Travelocity, American Express, even Concur rising - sites came and went quickly and made it easy for AccorHotels to research and then buy Raffles, Sofitel, Novotel and for Intercontinental and others to user in the era of acquisitions and mergers. Meanwhile the Internet wasn’t just about booking hotels at chains easily. VRBO began in 1995 when David Clouse wanted to rent his condo in Breckenridge and got sick of classifieds. Seeing the web on the rise, he built a website and offered subscriptions to rent properties for vacations, letting owners and renters deal directly with one another to process payments. Vacation Rentals By Owner, or VRBO would expand through the 90s. And then Paris Hilton happened. Her show The Simple Life in 2003 led to a 5 year career that seemed to fizzle at the Toronto International Film Festival in 2008 with the release of a critical documentary of her called Paris, Not France. The mergers and acquisitions and globalization and being packed in stale smokey rooms like sardines seemed to have run its course. Boutique hotels were opening, a trend that started in the 90s and by 2008 W Hotels was expanding into Europe, now with 55 properties around the world. And that exemplifies what some of this backlash was against big chains that was starting to brew. In 2004, CEH Holdings bought a few websites to start HomeAway.com and in 2006 raised $160 million in capital to buy VRBO and gain access to their then 65,000 properties. homeaway.com would be acquired by Expedia in 2015 for $3.9 billion, but not before a revolution in the hospitality industry began. That revolution started with 2 industrial design students. Brian Chesky and Joe Gebbia had come from the Rhode Island School of Design. After graduation Gebbia would move to San Francisco and Chesky would move to Los Angeles. They had worked on projects together in college and Gebbia bugged Chesky about moving to San Francisco to start a company together for a few years. By 2007 Chesky gave in and made the move, becoming one of Gebbia’s two roommates. It was the beginning of the Great Recession. They were having trouble making rent. The summer of 2008 brought the Industrial Designers Society of America’s Industrial Design Conference to San Francisco. They had the idea to take a few air beds from a recent camping trip and rent them out in their apartment. Paris Hilton would never have done that. They reached out to a former roommate of theirs, Nathan Blecharczyk. He’s a Harvard alum and pretty rock solid programmer and signed on to be a co-founder, building them a website in Ruby on Rails. They rented those three airbeds out and called their little business airbedandbreakfast.com. They thought they were on to something. I mean, who wouldn’t want to rent an airbed and crash on someone’s kitchen floor?!?! But reality was about to come calling. Venture capital was drying up due to the deepening recession. They tried to raise funding and failed. And so far their story seems pretty standard. But this is where I start really liking them. They bought a few hundred boxes of cereal and made '"Obama O's" and "Cap'n McCain's" to sell at the Democratic National Convention in 2008 for $40 per box. They sold $30,000 worth, enough to bootstrap the company. They would go to South By South West and visit events, growing slowly in New York and San Francisco. The money would last them long enough to make it into Y Combinator in 2009. Paul Graham and the others at Y Combinator has helped launch 2,000 companies, including Docker, DoorDash, Dropbox, GitLab, Gusto, Instacart, Reddit, Stripe, Twitch, and Zapier. They got $20,000 from Y Combinator. They changed the site to airbnb.com and a people started to book more and more stays - and not just with airbeds, but rending their full homes out. They charged 3% of the booking as a fee - a number that hasn’t really changed in all these years. They would get $600,000 in funding from Sequoia Capital in 2009 when they finally got up to 2,500 listings and had 10,000 users. Nothing close to what homeaway.com had, but they would get more funding from Sequoia and added Greylock to the investors and by the close of 2010 they were approaching a million nights booked. From here, the growth got meteoric. They won the app award during a triumphant return to South By South West in 2011 and went international, opening an office in London and expanding bookings to 89 countries. The investments, the advertising, the word of mouth, the media coverage. So much buzz and so much talk about innovation and disruption. The growth was explosive. They would iterate the website and raised another $112 million dollars in venture capital. And by 2012 they hit 10 million nights booked. And that international’s expansion paid off with well over half being outside of the United States. Growth of course led to problems. A few guests trashed their lodgings and Airbnb responded with a million dollar policy to help react to those kinds of things in the future. Some of the worse aspects of humanity can be seen on the web. They also encountered renters trying to discriminate based on race. So they updated their policies and took a zero tolerance approach. More importantly, they responded that they didn’t have to think of such things given the privilege of having a company founded by three white guys. They didn’t react with anger or displacement. They said we need to be better, with every problem that came up. And the growth continued. Doubling every year. They released a new logo and branding in 2014 and by 2016 were valued at $30 billion dollars. They added Trips, which seems to still be trying to catch up to what Groupon started doing for booking excursions years ago. During the rise of AirBNB we saw an actual increase in hotel profits. Customers are often millennials who are traveling more and more, given the way that the friction and some of the cost has been taken out of travel. The average age of a host is 43. And of the hosts I know, I can wager that Airbnb rentals have pumped plenty of cash back into local economies based on people taking better care of their homes, keeping fresh paint, and the added tourism spend when customers are exploring new cities. And not just visiting chains. After all, you stay at Airbnb for the adventure, not to go to shop for the same stuff at Forever 21. Even if you take out the issues with guests trashing places and racism, it still hasn’t all been sunshine and unicorns. AirBNB has been in legal battles with New York and a few other cities for years. Turns out that speculators and investors cause extra strain on an already over-burdened housing market. If you want to see the future of living in any dense population center, just look to New York. As the largest city in the US, it’s also the largest landlord of any public institution with over 400,000 tenants. And rent is rising almost twice as fast as incomes with lower income rents going up faster than those of the wealth. Independent auditors claim that AirBNB is actually accountable for 9.2 percent of that. But 79 percent of hosts use their Airbnb earnings to afford their apartments.And if many of the people that count on AirBNB to make their rent can’t afford their apartments. AirBNB argues their goal is to have “one host, one home” which is to say they don’t want a lot of investors. After all, will most investors want to sit around the kitchen table and talk about the history of the city or cool tidbits about neighborhoods. Probably not. AirBNB was started to offer networking opportunities and a cool place to stay that isn’t quite so… sterile. Almost the opposite of Paris Hilton’s life, at least according to TMZ and MTV shows. San Francisco and a number of other cities have passed ordinances as well, requiring permits to rent homes through AirBNB and maximizing the number of days a home can be rented through the service, often to about two thirds of a year. But remember, AirBNB is just the most visible but not the only game in town. Most category leaders have pre-existing competition, like VRBO and HomeAway. And given the valuation and insane growth of AirBNB, it’s also got a slew of specialized competitors. This isn’t to say that they don’t contribute to the problems with skyrocketing housing costs. They certainly do. As is often the case with true disruptors, Pandora’s Box is open and can’t be closed again. Regulation will help to limit the negative impacts of the disruption but local governments will alienate a generation that grew up with a disruption if they are overly-punitive. And most of the limits in place are easily subverted anyways. For example, if there’s a limit on the number of nights you can rent, just do half on VRBO and the other half on Airbnb. But no matter the problems, AirBNB continues to grow. They react well. Gebbia, now the CEO, has a deep pipeline of advisors he can call on in times of crisis. Whether corporate finance, issues with corporate infighting, crisis management, or whatever the world throws at them, the founders and the team they’ve surrounded themselves with have proven capable of doing almost anything. Today, AirBNB handles over half a million transactions per night. They are strongest with millineals, but get better and better at expanding out of their core market. One adjacency would be corporate bookings through a partnership with Concur and others, something we saw with Uber as well. Another adjacency. They now make more money than the Hilton and Hilton subsidiaries. Having said that, the major hotel chains are all doing better financially today than ever before and continue to thrive maybe despite, or maybe because AirBNB. That might be misleading though, revenue per room is actually decreasing correlative to the rise of AirBNB. And of course that’s amplified at the bottom tier of hotels. Just think of what would have happened had they not noticed that rooms were selling out for a conference in 2007. Would what we now call the “sharing” economy be as much a thing? Probably. Would someone else have seized the opportunity? Probably. But maybe not. And hopefully the future will net a more understanding and better connected society once we’ve all get such intimate perspectives on different neighborhoods and the amazing little ecosystems that humanity has constructed all over the world. That is the true disruption: in an age of global sterility, offering the most human of connections. As someone who loves staying in quirky homes on Airbnb, a very special thanks to Chesky, Gebbia, Blecharczyk, and the many, many amazing people at Airbnb. Thank you for reacting the way you do to problems when they arise. Thank you for caring. Thank you for further democratizing and innovating hospitality and experiences. And most importantly, thank you for that cabin by the lake a few months ago. That was awesome! And thanks to the listeners who tuned in to this episode, of the History of Computing Podcast. Have a great day!